David Blanchflower: The Bank of England gets it wrong yet again
Economic Outlook: For the umpteenth time the Bank is forecasting rapid recovery
Four times a year, on the second Wednesday of the month, the economics journalist pack gathers – in February, May, August and November – in the main conference room at the Old Lady of Threadneedle Street to hear the prognostications of the Monetary Policy Committee (MPC) on the economy. Well actually, not all of the members of the MPC, because the four external members are never asked to attend. Who cares what they have to say, because this is essentially a one-man show? In fact we all should, The one person who has called it right over the last year or so, Adam Posen, is the person we should be hearing from. But no this is Mervyn's circus. The Governor doesn't do dissent well and simply excludes them. Needless to say, I was never invited. All nine members should attend.
Sir Mervyn King starts out with an opening statement and then bats away questions for an hour, claiming nobody could possibly have expected anything better in such an uncertain world. This time he worried a little about what is happening in the Eurozone and explained that the forecasts couldn't possibly take account of what might occur there. Despite the fact that he is supposed to be representing the views of the MPC rather than his own, he once again said supportive things about the government's fiscal policy, which in all likelihood a number of other members of the MPC don't agree with.
As he has done on numerous occasions in the past, Sir Mervyn then made it clear that in his view none of what has happened could be blamed on the Bank as everything possible had been done, and away the journalists all trot. Given that banking crises are as old as the hills he cannot get away with throwing up his hands. Wasn't there a South Sea bubble? I don't buy it, sorry.
The Bank of England is packed full of economists paid out of the public purse, and the public is entitled to value for its money and it hasn't had it. To this point, there has been no official inquiry into why their overly optimistic forecasts on growth and inflation have been worse than the proverbial monkey throwing darts at a wall. The MPC's forecasts are aspiring to be hopeless; downward revision of the growth forecast has followed downward revision; upward revision of the inflation forecast has followed upward revision.
Above all, a review is needed because the Bank appears to be repeating the same mistakes that were made in the run-up to the recession, which is hardly surprising given that all the same people remain in charge. Why? The forecasts are ultimately the responsibility of two officials who have been in charge since July 2008: Charlie Bean, the Deputy Governor for Monetary Policy, who was previously the chief economist, and Spencer Dale, the current chief economist. It's hard to lead a team whose morale I gather is at rock bottom, when you have been consistently wrong. Bean and Dale's terms should not be renewed.
I have a couple of charts on growth (above) as evidence for the prosecution. The first is the MPC's growth forecast from its August 2008 Inflation Report, that foolishly I signed up to – although, in my defence, I quickly realised the error of my ways. This growth fan chart was released just over a month before the collapse of Lehman Brothers, and it shows what the MPC thought would happen to growth. It is reported as a band rather than a line because a forecast is made as a band rather than as a point and widens going forward.
If you do a word search in the Inflation Report from which it is taken, the word "recession" never appears. The central projection – the dark green part of the forecast – shows that the MPC expected there would be no recession and there was only a slight chance of even a quarter of negative growth. Indeed, it is perfectly feasible according to the chart, that annual growth in 2011 would be as much as 5 per cent.
The second chart is from the February 2012 report, which shows that, far from being no recession, GDP fell by over 7 per cent. According to the most recent data, less than half of the lost output has been restored, making it comparable in depth but longer lasting than the Great Depression. The public is entitled to ask why nobody at the Bank has taken responsibility for failing to spot the biggest financial crisis in the last century – they missed the big one, arguably comparable to the CIA's failure to predict the fall of the Berlin wall.
The second chart gives cause for concern because for the umpteenth time the MPC is forecasting rapid recovery, which is extremely unlikely to happen, and it seems that little has been learnt. The same team remains in charge, so it's hardly surprising the MPC makes the same forecasting errors over and over again. Growth is going to take off apparently and will be around 3 per cent per annum or even above that in two years. Indeed there is some prospect, according to the MPC, that in 2013 growth will be as much as 5 per cent and even 6 per cent in 2015 with little or no chance of zero or negative growth. Nobody believes that nonsense. LOL.
The fact the MPC is being overly optimistic about growth implies that the recent injection of £50 billion additional asset purchases at their February meeting is just the beginning, even if Greece doesn't default. King will claim at the next press conference that it wasn't the Bank's fault and who could have expected them to get their forecasts right? The answer is all of us. The public is entitled to know what went wrong at the Bank of England. The buck inevitably stops at the top.
David Blanchflower is professor of economics at Dartmouth College and a former member of the Bank of England's Monetary Policy Committee
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